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Do Geopolitics Still Have a Firm Hold on Commodities, Oil, Gold?

Written by: Sam Kikla06/27/14 - 1:33 PM EDT

Tickers in this article:
GLD SLV USO

NEW YORK ( Best Credit ) -- Volatility in commodities markets is increasingly significant as geopolitical tensions, especially in Iraq and Ukraine, fail to recede from the financial headlines. During these types of discussions, most attention tends to center around gold and precious metals.

That's why we see more discussion of the SPDR Gold Trust ETF and iShares Silver Trust ETF in cases like the Ukraine upheaval, where investors struggle to move into safe-haven assets. Commodities are generally considered to be a stable store of value during times of broader economic uncertainty, and geopolitical events can drive investors to make major changes in their portfolio strategies in order to compensate for the changing world landscape.

The latest example of these types of tendencies can be seen in oil. Both Brent and West Texas Intermediate (WTI) oil have hit their lowest levels in two weeks. But the reactions here might seem counterintuitive, given the fact that tensions in the Middle East usually result in frantic buying of energy assets on the expectation that supply constraints will follow. In the latest news out of Iraq, we have seen some significant changes in market trends.

But the ultimate result might be somewhat unexpected, as heightened oil production in the U.S. could serve as an appropriate counterbalance to the effects of sustained military turmoil in the Middle East.

Supply, Demand and the U.S. Dollar

As we move forward, investors will need to account for these factors before making knee-jerk investment reactions to seemingly related news headlines. Turmoil in the Middle East is generally thought of as bullish for oil and its correlated assets, like the United States Oil Fund LP ETF . But many investors could be surprised if they follow the historical "textbook rules" and simply buy oil every time the topic is mentioned in the financial media.

The real issue here is supply and demand -- and rising U.S. energy stockpiles and the potential for increases in total crude exports out of Iraq should continue to bring some stability to the underlying oil price. It should be remembered that Iraq is the No. 2 oil producer in OPEC (behind only Saudi Arabia), so rising export numbers will generate bearish effects -- even during times of increased hostility and negative Middle Eastern exposure in the financial media.

Improved production numbers in the U.S. add onto these market influences, and it is difficult to ignore the fact that crude stockpiles in the U.S. rose above 388 million barrels last week (a gain of 1.74 million barrels).

Longer term, it is clear that the trend is upward in oil and the energy space as a whole. But the prudent investor will watch the underlying market influences -- supply, demand and the value of the U.S. dollar -- rather than news headlines that might only drive short-term volatility. In other words, geopolitical tensions like those seen in Iraq could lead to short-term pops in the oil price. But this will not be what defines the larger trend in oil.